Question 1: Flexed Budget (35 marks) Nelson & Drake Plc, a food manufacturer specialises in the production of frozen cakes and sweet products, seling mainly to supermarkets. The following monthly budget applies to one of its products. Original budget E000 EODO Sales 1,000 Costs: 400 Ingredients Labour and energy Axed overheads 100 300 900 Profit 200 For the ingredients, a standard quantity of 5 kg per pack is required per product; a standard price of 40 per kg applies in the original budget. Considerable attention has been given to increasing the market share of this product whilst attempting to maintain its profitability. Consequently, since the preparation of the budget the management team Implemented some changes to the manufacture and sale of this product. These changes were as follows: The product was budgeted to sell for E5.00 per pack but, to promote sales, a price reduction on all sales to 4.50 per pack was made. II. The supplier of ingredients was changed, and this secured a price reduction to 37.5p per kg on all ingredient supplies in return for a long-term contract 1. The method of working was changed in order to reduce the direct labour and energy costs which are regarded as variable. All of the above changes applied for the whole of the month just ended and are reflected in the actual results shown below. The management intend, however, to use the original budget for both cost and volume, as a reference point until the effect of the changes has been evaluated. The following actual results have just been reported for the month: Actual results E000 E000 Sales 1,080 Costs: Ingredients 520 Labour and energy 110 Fixed overheads 340 920 Profit 10 Required: a) Advise Nelson & Drake which factors should be considered when deciding which variances to Investigate. (10 marks) b) Prepare a flexible budget (for the actual quantity sold in the month just ended) based on the original budgeted unit costs and selling price. (15 marks) c) Provide a commentary on the variances you have produced. Within this commentary refer to possible interrelationships between the variances and how the level of fixed overheads may be reduced. (10 marks) (Total: 35 marks) Question 1: Flexed Budget (35 marks) Nelson & Drake Plc, a food manufacturer specialises in the production of frozen cakes and sweet products, seling mainly to supermarkets. The following monthly budget applies to one of its products. Original budget E000 EODO Sales 1,000 Costs: 400 Ingredients Labour and energy Axed overheads 100 300 900 Profit 200 For the ingredients, a standard quantity of 5 kg per pack is required per product; a standard price of 40 per kg applies in the original budget. Considerable attention has been given to increasing the market share of this product whilst attempting to maintain its profitability. Consequently, since the preparation of the budget the management team Implemented some changes to the manufacture and sale of this product. These changes were as follows: The product was budgeted to sell for E5.00 per pack but, to promote sales, a price reduction on all sales to 4.50 per pack was made. II. The supplier of ingredients was changed, and this secured a price reduction to 37.5p per kg on all ingredient supplies in return for a long-term contract 1. The method of working was changed in order to reduce the direct labour and energy costs which are regarded as variable. All of the above changes applied for the whole of the month just ended and are reflected in the actual results shown below. The management intend, however, to use the original budget for both cost and volume, as a reference point until the effect of the changes has been evaluated. The following actual results have just been reported for the month: Actual results E000 E000 Sales 1,080 Costs: Ingredients 520 Labour and energy 110 Fixed overheads 340 920 Profit 10 Required: a) Advise Nelson & Drake which factors should be considered when deciding which variances to Investigate. (10 marks) b) Prepare a flexible budget (for the actual quantity sold in the month just ended) based on the original budgeted unit costs and selling price. (15 marks) c) Provide a commentary on the variances you have produced. Within this commentary refer to possible interrelationships between the variances and how the level of fixed overheads may be reduced. (10 marks) (Total: 35 marks)